Whether you have held property as an investment or as a by-product of business, selling your commercial real estate can be a lucrative decision. However, it is important to be aware of hidden taxes that may arise during the process.
Understanding these taxes can help ensure a smooth and financially sound transaction.
Capital gains tax
One significant tax to watch out for is the capital gains tax. This tax applies to the profit made from selling an investment property. The rate depends on how long you held the property. For example, the gain on investment property held for over a year is typically taxed at the long-term capital gains rate tax which for most taxpayers is 20%.
Depreciation recapture
Depreciation is a tax benefit that allows commercial property owners to deduct the cost of the property over time. However, when you sell the property, the IRS may impose a tax (typically at ordinary income tax rates) on previously deducted depreciation expenses. Be sure to factor in the potential depreciation recapture when selling commercial real estate.
Net Investment Income Tax
The Net Investment Income Tax is a 3.8% tax on certain net investment income, including gains from the sale of real estate, for high-income individuals. This tax comes in addition to the capital gains tax and can impact the overall tax liability on the sale of commercial real estate by taxpayers who are subject to this tax.
Closing costs
While not a direct tax, closing costs can be another financial consideration when selling commercial real estate. These costs include various fees associated with the transaction, such as title insurance, broker expenses and recording fees. Sellers should prepare for these expenses, as they can significantly impact the net proceeds from the sale.
Selling commercial real estate can come with its share of hidden taxes and expenses that may even catch experienced investors by surprise. Being proactive and understanding these financial factors will contribute to a successful and financially prudent real estate transaction.